Chapter 22, Problem 8BP

1.

To determine

Prepare monthly sales budgets for each of the first three months of 2016.

Explanation of Solution

Sales Budget: The sales budget is the budget prepared to estimate the revenue, the expected number of units to be sold and the expected selling price for each product. The sales budget is the first step for an operating budget and the basis for the production and cost of goods sold budget.

Prepare monthly sales budgets for each of the first three months of 2016:

Company I
Sales Budgets
January, February, and March 2016
	Budgeted Units	Budgeted Unit Price	Budgeted Total Dollars
January 2016	6,000	$45	$270,000
February 2016	8,000	45	360,000
March 2016	10,000	45	450,000
Total for the first quarter	24,000		$1,080,000

Table (1)

Conclusion

Therefore, the total estimated sales units and dollar amount for the first quarter is 24,000 units and $1,080,000.

2.

To determine

Prepare monthly merchandise purchases budgets for each of the first three months of 2016.

Explanation of Solution

Purchases budget: This budget shows the expected purchase requirement for the budgeted period.

Prepare monthly merchandise purchases budgets for each of the first three months of 2016:

Company I
Merchandise Purchases Budgets
January, February, and March 2016
	January	February	March	Total
Next month’s budgeted sales	8,000	10,000	9,000
Ratio of inventory to future sales	× 25%	×  25%	× 25%
Budgeted ending inventory	2,000	2,500	2,250
Add: Budgeted sales	7,000	8,000	10,000
Required available merchandise	8,000	10,500	12,250
Less: Beginning inventory	(5,000)	(2,000)	(2,500)
Units to be purchased	3,000	8,500	9,750	21,250
Budgeted cost per unit	$30	$30	$30	$30
Budgeted merchandise purchases	$90,000	$255,000	$292,500	$637,500

Table (2)

Conclusion

Therefore, the total estimated purchase units and dollar amount for the first quarter is 21,250 units and $637,500.

3.

To determine

Prepare monthly selling expense budgets for each of the first three months of 2016.

Explanation of Solution

Selling expense budget: This budget shows the estimated selling expenses for the budgeted period.

Prepare monthly selling expense budgets for each of the first three months of 2016:

Company I
Selling Expense Budgets
January, February, and March 2016
	January	February	March	Total
Budgeted sales	$270,000	$360,000	$450,000
Sales commission percent	× 20%	× 20%	× 20%
Sales commissions expense	54,000	72,000	90,000	$216,000
Sales salaries	7,500	7,500	7,500	22,500
Total selling expenses	$61,500	$79,500	$97,500	$238,500

Table (3)

Conclusion

Therefore, the total budgeted selling expense budget for the first quarter is $238,500.

4.

To determine

Prepare monthly general and administrative expense budgets for each of the first three months of 2016.

Explanation of Solution

General and administrative expense budget: This budget shows the estimated General and administrative expenses for the budgeted period.

Prepare monthly general and administrative expense budgets for each of the first three months of 2016:

Company I
General and Administrative Expense Budgets
January, February, and March 2016
	January	February	March	Total
Salaries	$12,000	$12,000	$12,000	$36,000
Maintenance	3,000	3,000	3,000	9,000
Depreciation (Working note 1)	6,375	7,375	7,675	21,425
Total expenses	$21,375	$22,375	$22,675	$66,425

Table (4)

Working note 1: Compute the depreciation expense for each month,

	Annual Amount	January	February	March	Total
Equipment owned on 12/31/2015	$67,500	$5,625	$5,625	$5,625	$16,875
Purchased in January	9,000	750	750	750	2,250
Purchased in February	12,000	0	1,000	1,000	2,000
Purchased in March	3,600	0	0	300	300
Totals		$6,375	$7,375	$7,675	$21,425

Table (5)

Conclusion

Therefore, the total budgeted general and administrative expense for the first quarter is $66,425.

5.

To determine

Prepare monthly capital expenditure budgets for each of the first three months of 2016.

Explanation of Solution

Capital expenditure budget: Capital expenditure budget is reports the dollar amounts expected to be spent on the purchase of additional assets like plant, machinery which are used to carry the budgeted business activities.

Prepare monthly capital expenditure budgets for each of the first three months of 2016:

Company I
Capital Expenditures Budgets
January, February, and March 2016
	January	February	March
Equipment purchases	$72,000	$96,000	$28,800
Land purchase	0	0	150,000
Total	$72,000	$96,000	$178,800

Table (6)

Conclusion

Therefore, the total budgeted capital expenditure for the months January, February, and March are $72,000, $96,000, and $178,800 respectively.

6.

To determine

Prepare monthly cash budgets for each of the first three months of 2016.

Explanation of Solution

Cash budget: This budget shows the total budgeted cash receipts and cash disbursements for the budgeted period.

Prepare monthly cash budgets for each of the first three months of 2016

Company I
Cash Budgets
January, February, and March 2016
	January	February	March
Beginning cash balance	$ 36,000	$182,850	$107,850
Cash receipts from customers (Working note 2)	382,500	421,500	355,500
Total cash available (A)	418,500	604,350	463,350
Cash disbursements:
Payments for merchandise (Working note 3)	72,000	306,000	123,000
Sales commissions	54,000	72,000	90,000
Sales salaries	7,500	7,500	7,500
General & administrative salaries	12,000	12,000	12,000
Maintenance expense	3,000	3,000	3,000
Interest ($15,000 x 1%)	150
Taxes payable			90,000
Purchases of equipment	72,000	96,000	28,800
Purchase of land			150,000
Total cash disbursements (B)	220,650	496,500	504,300
Preliminary cash balance $\left(\text{A}\right)\text{–}\left(\text{B}\right)$	$197,850	$107,850	$(40,950)
Repayment of loan to bank	(15,000)
Additional loan from bank	0	0	76,950
Ending cash balance	$182,850	$107,850	$36,000
Loan balance, end of month	$0	$0	$0

Table (7)

Working note 2: Compute the cash receipts from customers:

	January	February	March	Total
Total sales	$270,000	$360,000	$450,000	$1,080,000
Cash sales (25%)	$ 67,500	$ 90,000	$112,500	$270,000
Credit sales (75%)	$202,500	$270,000	$337,500	$810,000
Cash collections:
Receivables at 12/31/2015	$315,000	$210,000	0	$525,000
January credit sale (60%:40%)	0	121,500	$ 81,000	202,500
February credit sales (60%:40%)	0	0	162,000	162,000
Total from credit customers	$315,000	331,500	243,000	889,500
Cash sales	67,500	90,000	112,500	270,000
Total cash received	$382,500	$421,500	$355,500	$1,159,500

Table (8)

Working note 3: Compute the cash payments for merchandise:

	January		February	March	Total
Credit purchases	$90,000	$255,000		$292,500	$637,500
Accounts payables at 12/31/2015	$72,000	$288,000			$360,000
January purchase (20%:80%)		18,000		$72,000	90,000
Second month (20%:80%)	0	0		51,000	51,000
Total paid on purchases	$72,000	$306,000		$123,000	$501,000

Table (9)

7.

To determine

Prepare a budgeted income statement for the entire first quarter.

Explanation of Solution

Budgeted income statement: The budgeted financial statement which reports the budgeted revenues and expenses from business operations and the result of those operations as net income or net loss for a budgeted period is referred to as budgeted income statement.

Prepare a budgeted income statement for the entire first quarter:

Company I
Budgeted Income Statement
For Three Months Ended March 31, 2016
	Amount ($)	Amount ($)
Sales		$1,080,000
Cost of goods sold (24,000 units @ $30)		720,000
Gross profit		360,000
Operating expenses:
Sales commissions	$216,000
Sales salaries	22,500
General administrative salaries	36,000
Maintenance expense	9,000
Depreciation expense	21,425
Interest expense	150	305,075
Income before taxes		54,925
Income taxes (40%)		21,970
Net income		$32,955

Table (10)

Conclusion

Therefore, the budgeted net profit for the first quarter is $32,955.

8.

To determine

Prepare a budgeted balance sheet as of March 31, 2016.

Explanation of Solution

Budgeted Balance Sheet: Budgeted Balance Sheet is one of the budgeted financial statements which summarize the budgeted assets, the liabilities, and the Shareholder’s equity of a company at a given date.

Prepare a budgeted balance sheet as of March 31, 2016:

Company I
Budgeted Balance Sheet
March 31, 2016
Assets
Cash (Cash budget)		$36,000
Accounts receivable (Working note 4)		445,500
Inventory (Working note 5)		67,500
Total current assets		549,000
Equipment (Working note 6)	$736,800
Less: accumulated depreciation (Working note 7)	88,925	647,875
Land (Capital budget)		150,000
Total assets		$1,346,875
Liabilities and Equity
Accounts payable (Working note 8)		$  496,500
Bank loan payable (cash budget)		76,950
Taxes payable (due 4/15/2016) (Income statement)		21,970
Total liabilities		595,420
Common stock (Unchanged)	$472,500
Retained earnings (Working note 9)	278,955
Total stockholders’ equity		751,455
Total liabilities and equity		$1,346,875

Table (11)

Working notes:

Working note 4: compute ending receivables
Beginning receivables	$525,000
Credit sales	810,000
Less: Collections	(889,500)
Ending receivables	$445,500
Working note 5: Compute the ending inventory
Beginning inventory	$150,000
Purchases	637,500
Less: Cost of goods sold	(720,000)
Ending inventory (2,250 units × $30)	$67,500
Working note 6: Compute the equipment balance
Beginning equipment	$540,000
Purchased in January	72,000
Purchased in February	96,000
Purchased in March	28,800
Equipment as on March 31	$736,800
Working note 7: compute the accumulated depreciation
Beginning accumulated depreciation	$67,500
Depreciation expense	21,425
Accumulated depreciation as on March 31	$88,925
Working note 8: Compute the accounts payable as on March 31
Beginning accounts payable	$360,000
Purchases	637,500
Payments	(501,000)
Accounts payable as on March 31	$496,500
Working note 8: Compute the retained earnings as on March 31
Beginning retained earnings	$246,000
Net income	32,955
Retained earnings as on March 31	278,955

Table (12)